I cover entrepreneurs, people who create value (and make money) out of the ideas in their heads. I spent three years on staff at Forbes before leaving to start Haymaker , a PR firm for startups, in May 2014. (Don't worry, I never write about my clients.) In the age of "The Social Network" myth, I get a kick out of delving into the reality of launching a business. Before joining Forbes I spent a year toiling in startup obscurity at Squidjob.com. Since my bedroom was the office, I never had to sleep under my desk. Comments, tips and forceful criticism are appreciated.

'An Abomination That Should Stop': What's The Problem With Secondary Markets?

For years, the rise of secondary markets like SecondMarket and SharesPost appeared to be welcomed by all of the major players in the venture-backed startup community. Armed with a reliable means of selling stakes long before an IPO or acquisition, founders can now keep control of their companies – and shield them from the searing gaze of public markets – longer. Early employees and investors, meanwhile, have seen their liquidity horizons shrink, freeing up talent and profits to fuel new crops of young companies at shorter intervals.

Turns out, not everyone is a fan.

In a panel titled “Post-Funding Risk And Liquidity”at Gust’s Venture Forward Conference last Thursday, David Hornik of August Capital and Tangent Capital’s Bob Rice launched lengthy denunciations of the secondary markets. Hornik derided them “as an abomination that should stop”. A third panelist, Gil Beyda of Genacast Ventures, defended the markets to some extent, though he himself hasn’t used them and wouldn’t recommend them to his portfolio companies.

I caught up with the panelists as well as representatives from SecondMarket and SharesPost. A summary of Hornik and Rice’s criticisms, and responses from market reps where appropriate, is posted below.

Transparency

(To be clear, the following statements do not apply to SecondMarket, except in the case ofFacebook. Since 2010, SecondMarket has required companies traded on the site to disclose two years of audited financials.)

Hornik and Rice touched on a number of criticisms, but none so fundamental as the markets’ lack of transparency. Simply put, no one knows what the hell is going on with companies traded in secondary markets. “People literally don’t know what they’re buying,” Rice stresses. Beyond the crumbs thrown out to the press, most investors who want a piece of Twitter or Dropbox have no sense of the companies’ cost structure, revenue or outlook. Imagine, for example, investing in Groupon before learning of their $540 million in operating losses.

Greg Brogger, SharesPost CEO, says that most of the site’s transactions take place after a company has already filed an S-1, so investors have access to financial information. The majority of purchasers who invest before an S-1 filing, he insists, are already existing shareholders with information rights. In the minority of cases where investors aren’t privy to such disclosures, Brogger pointed out that because these are forward looking investments in young, dynamic companies, financial history doesn’t carry the same relevance. Point taken, kind of. But also: Groupon.

Greg Brogger, CEO of SharesPost

Still, Hornik warns, “It creates an incredibly risky market for people who don’t have sufficient information.” The result is often pure speculation. Investors clamoring to get a piece of the next hot tech company often know little beyond the fact that it’s apparently the next hot tech company. Those engaged in larger private placements, however, may get access to financial information under a non-disclosure agreement. It’s speculated that Goldman Sachs, before raising nearly $2 billion for Facebook last year, got a peek at the company’s user metrics and financials. The fact that Goldman then doubled the amount of stock it sold on the day of the IPO, announcing the change barely 48 hours before Facebook’s debut in a decision that now appears to coincide with selective disclosure of the company’s second quarter results, hints at the kinds of mischief that can occur in this opaque market.

“The idea that these things are called ‘markets’ – that term just isn’t true here,” Rice says. “A market implies liquidity and transparency. Maybe call it an ‘insiders’ liqudity facility’, but don’t call it a ‘market’.

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Yup. The bottom line is that it’s an asymmetrical market oftentimes, with some players having more access to information than others. With Facebook gone, most platforms seem to be moving away from a model that allows for that sort of thing but still, investors and companies need to be careful.

This too shall pass into the regulatory world. It’s market building, or you may call it market evolution. We are watching the development of what may or may not be an important future market. If activity continues at a low, perhaps moderate level, likely no or little oversight will be needed. If the market continues to grow, it will reach a point where regulation will be required. The money involved will become too appealing and will bring in the crooks.